Venture Capitalist Chamath Palihapitiya Sees ‘Blood in the Water’

Chamath Palihapitiya, a former Facebook executive who now runs venture-capital firm Social+Capital Partnership, says he’s sees blood in the water.

Collision Conference Las Vegas

Chamath Palihapitiya, the founder of venture-capital firm Social+Capital Partnership, sees blood in the water and he says that’s a good thing for the tech industry.

Palihapitiya, speaking at the Collision technology conference in Las Vegas this week, believes the recent chill in the tech stocks is part of a broader “rerating” happening across the industry.

Despite the possible hit to his portfolio — which includes the not-yet-public Web storage company Box — Palihapitiya says this is a healthy turn for the ecosystem because valuations were becoming illogical.

“There’s blood in the water, there’s blood on the walls, there’s blood everywhere. It’s awesome,” the former Facebook executive said.

Palihapitiya, who is known for making brash and often controversial calls, says the “floor is roughly now” and money will soon rush back to the equity markets. The more important question, he says, is how investors will behave when momentum shifts. He is hopeful that the market will operate more rationally, based on how dramatically the big institutional investors have recently pulled back.

“You had the buyers of last resort — meaning folks like Fidelity, T. Rowe Price, etc.— who have paused and said you cannot count me in your book for your IPO anymore. When those guys are being that circumspect, that disciplined now, that’s a really good sign that we’re entering a new phase of rational value.”

So how can entrepreneurs reset their expectations for valuations?

Palihapitiya says the story of LinkedIn is very telling. He considers LinkedIn to have very strong signals: high gross margins, a steady march to a billion users, and plenty of revenue. Still, the stock has dropped more than 40% from its 52-week-high and is now valued at a little more than four times expected 2016 revenue, according to Palihapitiya.

He says companies with worse metrics should not expect to be worth more than that. For startups just starting to generate revenue, he cautions against trying to raise capital at mega, multi-billion dollar valuations “because it may not all hang together ultimately.”

As for what this means for his portfolio company, Box, which pushed back its IPO but is still expected to go public this year — Palihapitiya is not so sure. He does think the timing could have been better.

“We don’t know where it’s going to go,” he says. “I’d loved for it to have come out five months earlier, but it isn’t.”